Wednesday, October 13, 2004

A colleague of mine pointed me to Paul Krugman's column in yesterday's New York Times, "Checking the Facts, In Advance" (archived here). Krugman begins his column with the statement:

It's not hard to predict what President Bush, who sounds increasingly desperate, will say tomorrow. Here are eight lies or distortions you'll hear, and the truth about each:

I don't have time to go through each of his points individually, but I will simply point out the key error in his second point on unemployment. He writes:

Mr. Bush will boast about the decline in the unemployment rate from its June 2003 peak. But the employed fraction of the population didn't rise at all; unemployment declined only because some of those without jobs stopped actively looking for work, and therefore dropped out of the unemployment statistics. The labor force participation rate - the fraction of the population either working or actively looking for work - has fallen sharply under Mr. Bush; if it had stayed at its January 2001 level, the official unemployment rate would be 7.4 percent.

First, let's identify the part that Krugman gets right. The employment-population ratio is unchanged between June 2003 and September 2004: 62.3 percent of the population over age 16 is employed. The labor force participation rate has fallen over that period of time from 66.5 percent to 65.9 percent, and the unemployment rate has fallen from 6.3 to 5.4 percent of the labor force.

Next, consider the part that Krugman gets wrong. The BLS keeps track of information on several different types of unemployment rate, precisely to make sure that changes in the unemployment rate are not driven by changes in discouraged workers. The BLS uses the following concepts:

Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past.

Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for a job.

Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

How have the unemployment rates including these groups as unemployed members of the labor force changed? According to the data at the BLS:

Unemployment Rate: Fell from 6.3 to 5.4 percent between 6/2003 and 9/2004

In no case is Krugman's statement, "unemployment declined only because some of those without jobs stopped actively looking for work, and therefore dropped out of the unemployment statistics" supported by the data. When those workers are included, we still get about a 0.9 percentage point drop in the unemployment rate, however it is measured.

What, then, is the explanation for how the labor force participation rate dropped, if it is not due to people becoming dissatisfied with the labor market? Consider more people voluntarily taking time out of the labor force--whether to retire, raise a family, or go back to school--as just three possibilities.

Sadly, if you are going to read Krugman, then you probably also have to read Luskin, and you should double-check for yourself any facts asserted by either one.

More importantly, I think it is incredibly poor form for the "paper of record," or any newspaper at all, to not insist that all of its columnists have their writing fact-checked. Every statistic I have just listed is available at the BLS website that reports on the household survey of employment, which is the source of all data about the unemployment rate. The alternative measures of unemployment are in Table A-12 each month. (Follow this link, click the boxes for "Seasonally Adjusted" on items U-3 through U-6, and see for yourself.)

I take a small exception to your post. I was let go and looked for work for 6 months before deciding that what I really needed to do to get a decent paying and more stabile career path was to go back to school. If I had been able to find a job, I'd be working. I don't think my situation is atypical of many adult students. While what we are doing may be better for the economy in the future (increasing our marketable skills, giving us future higher wages and thus improving the average income and consumption rates) I would make the argument that our situation should not be used to LOWER the unemployment rate.

Your situation raises an interesting point about whether the CPS is measuring what it claims to. Given your story, I would have classified you as a discouraged worker--you cite a job market-related reason for not looking for work at the present time. You would then be included in one of the augmented measures of the unemployment rate, and the decline in those rates would indicate that there are fewer people in your situation (as a share of the labor force) now than in June 2003 when the unemployment rates peaked.

Are you sure you understand the precise definitions used in the household survey because you seem confused in the comment above. If you don't understand the meaning of the data then it is easy to misinterpret it. Krugman knows what the various tables can, and more importantly, cannot tell us which is why he relies mainly on the employment/population ratio. You may disagree with him, but I think calling his statement false is overstating your case.

About Me

I am a Professor of Economics and the Director of the Nelson A. Rockefeller Center at Dartmouth College. I am on the board of Ledyard Financial Group (LFGP) and currently serve on the Census Scientific Advisory Committee. I blog about economics, politics, and current events at http://samwick.blogspot.com. The opinions expressed here, there, and everywhere do not necessarily reflect the views of Dartmouth College or any other institution with which I am affiliated.

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